European shares closed higher on Thursday, extending the two-week rally that has propelled indexes to multi-year highs, as a string of upbeat U.S. data fueled hopes of an improvement in the global economic outlook.
Shares in European telecom equipment makers rallied, with Ericsson closing up 2.4 percent and Alcatel-Lucent up 2.6 percent, after the world's largest mobile carrier China Mobile said it plans to spend $6.7 billion to develop 4G technology this year.
The pan-European FTSEurofirst 300 Index of blue chip European shares closed up 1.1 percent, surpassing an intraday high of 1,197.73 points reached last Friday, a level not seen since September 2008.
"We're bullish, as more and more investors are, and we're seeing people getting rid of their derivative hedges, which explains the drop in volatility indexes," said David Thebault, head of quantitative sales trading at Global Equities.
"The only worry is that we're seeing improving macro data from the United States, but not yet in Europe, which means the market is rising on hopes and not real signs, and the risk is that the rally won't be immune to disappointment from the macro side."
Investors were keeping a close eye on a two-day European Union summit starting on Thursday, which is expected to focus on how to address high unemployment and the need to ease austerity measures to revive economic growth.
"The market is expecting a change in tone about the austerity drive. The leaders should be realizing now that they need to loosen it otherwise the economy won't turn the corner," Global Equities's Thebault said.
The euro zone's Euro STOXX 50 Index finished up 1.5 percent at 2,744 points. The blue chip index, which has been hammered by Europe's three-year sovereign debt crisis, still needs to rise about 13 percent before reaching its 2008 levels.
The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely used measure of investor risk aversion, was down 10.9 percent on Thursday, signaling a sharp rise in equity investor optimism.
"It's a massive drop, and investors are indeed lowering their portfolio protection, but the expiry of options and futures contracts tomorrow is also mechanically fueling the drop," a Paris-based derivatives trader said.
Highest Buying Interest Since 2009
According to Societe Generale strategists, hedge funds have been increasing their short positions on volatility and long positions on equities, betting that central banks will continue to provide abundant liquidity to support the economic recovery.
"The Fed has strongly reiterated its intention to continue QE (quantitative easing) for now, and hedge funds have paid close attention," the strategists wrote in a note, saying the level of net buying interest on the S&P 500 is at its highest since June 2009.